Despite the second half's turmoil, some folks on Wall Street can look back and say 2007 was a good year.
Climate Change Finance
The awarding of this year's Nobel Peace Prize to Al Gore and the Intergovernmental Panel on Climate Change added an exclamation mark to what looks to be the most promising new finance opportunity to emerge this decade: the construction of tools and market mechanisms for reducing greenhouse gas emissions. Already a $30 billion annual market, trade in carbon emission credits is expected to grow to $560 billion by 2020. A further spur to jobs in climate change finance may arise when President Bush, who has largely succeeded in blocking any major U.S. initiatives in this field, leaves office in 2009.
Sovereign Wealth Funds
These government-sponsored institutions made a splash with multi-billion dollar investments in several troubled U.S. financial institutions and manufacturers, including Morgan Stanley ($5 billion equity injection from China Investment Corp.), Merrill Lynch ($4.4 billion from Singapore's Temasek Holdings), Citigroup ($7.5 billion convertible preferred stock investment from Abu Dhabi Investment Authority), Bear Stearns ($1 billion from China's Citic), UBS ($11.5 billion from the Government of Singapore Investment Corp. and an unnamed Middle East investor, reported to be the Saudi Arabian Monetary Authority) and Blackstone Group ($3 billion from China Investment Corp.). Sovereign wealth funds are expected to play a major role in global markets in coming years, as their assets, visibility and appetite for risk grow. Headcounts are growing as well: China Investment Corp., Dubai International Capital and Abu Dhabi Investment Authority have all advertised openings in the Western press.
Choosing the year's top-performing financial institution was pretty much a no-brainer. Our only real question was whether to recognize the company itself, or an associated person or group such as Chief Executive Lloyd Blankfein, the 16-member structured-products trading group, or Dan Sparks, the head of mortgage trading. (The Wall Street Journal identified them as the people who made a series of short bets against sub-prime that netted Goldman $4 billion in profit.) Since Goldman's full-year compensation per employee climbed 5.7 percent this year, on top of 2006's 26 percent increase, we figure most who work there are winners. We note a conspicuous exception: Goldman's once high-flying Global Alpha hedge fund, which suffered a second straight year of negative returns.
Crude oil's unrelenting price climb has had broad ramifications for the U.S. and world economies, politics and financial markets. Those impacts are deeply intertwined. For example, such seemingly separate developments as Russia's financial boom, Putin's great popularity and Arab governments' headline-grabbing investments in big U.S. companies all reflect high-priced oil. So, it's no surprise that traders, risk managers and bankers with experience in oil and other energy-related commodities are in demand. On the other hand, we sense an eventual collision with the top item on our list. As worldwide consensus solidifies around curbing carbon emissions, we wonder how much longer markets for carbon-based fuels can maintain their growth.
Media reports that the credit meltdown signaled a broad downturn for hedge funds proved premature. Despite a bad November and a scary August - which saw the demise of Sowood Capital Management and disastrous results from several high-profile model-driven "quant" funds - most of the sector's players are poised to end the year with respectable returns and, presumably, respectable bonuses for their managers and staff. The average hedge fund returned 10.2 percent through Nov. 30, handily beating the U.S. stock market's 6.2 percent return as measured by the S&P 500. Hedge fund recruiters tell us their clients' hiring plans haven't skipped a beat. Demand is especially strong for support and administrative staff with technology, operations, legal or compliance backgrounds.
Hedge funds weren't the only buy-side shops to end 2007 on a high note. Traditional long-only management firms did well too, as moderately higher equity markets lifted asset values and consequently, management fee revenues. Most large publicly traded asset management firms reported revenue up 15 - 20 percent for the first nine months of 2007 compared with the previous year, according to Aon Corp. Search firm Russell Reynolds Associates recently estimated that 2007 bonuses at asset management companies came in 15 - 20 percent above 2006. People working with alternative investments may pull in 20 - 30 percent more than last year.
Sleeper Pick for 2008: Distressed Debt Investing
Picking through the ruins of the sub-prime collapse, nimble fund managers are raising capital to invest in so-called "distressed" securities - debt of firms in or near bankruptcy, and other deeply troubled or non-performing assets. Recruiters see hiring in this niche beginning to ramp up, and expect more of the same in 2008. Distressed investing should blossom if the economy tanks and corporate default rates quadruple to the 4 percent range, as some predict. That would give these funds a broad range of assets to invest in.
Agree? Disagree? Tell us your winners - and losers - by posting a comment below.